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Will Blockchain Affect Your Practice or Firm? (Perspective)

A man walks out of a shop displaying a bitcoin sign during the opening ceremony of the first bitcoin retail shop in Hong Kong on February 28, 2014. Bitcoin was invented in the wake of the global financial crisis by a mysterious computer guru using the pseudonym Satoshi Nakamoto and unlike other currencies, it does not have the backing of a central bank or government. Photo by Philippe Lopez (AFP/Getty Images)

Editor’s Note:The author of this post is a legal technology and management consultant.

By Ron Friedmann, Fireman & Company

Both the legal and mainstream media have written many articles about the Blockchain. So I thought readers will appreciate hearing from three lawyers whose practices focus on it. I’ve asked them to explain what the blockchain is and its impact on law practice, business, and law firm management.

Three partners in three firms have kindly agreed to participate in this discussion:

Friedmann: Let’s start with quick introductions – tell me in a few sentences what your Blockchain practice looks like and how many of your colleagues focus on it.

Dewey: I have practiced transactional law for over 18 years with a particular specialty in finance transactions. Computer programming has been a hobby of mine since I was eight years old. At the intersection of law and blockchain technology, there is a need for legal professionals who understand both substantive areas of the law and the technical workings of blockchain protocols. So my blockchain practice is focused on designing blockchain-based tools for clients, especially finance clients who can greatly increase their efficiency with it, and advising clients on how blockchain technology could help them (and also where there is more hype than reality).

A year ago, the only colleagues who even knew what the blockchain was were focused solely on the money transmitter and associated licensing issues. That is now shifting with professionals in different areas looking at the technology from different angles (e.g., corporate lawyers looking at difference between conventional corporations and corporate finance versus decentralized autonomous organizations (DAOs)). Intellectual property rights in this area is another angle that is starting to attract interest. I expect the number of lawyers in my firm who touch upon blockchain technology to grow exponentially over the next year or so.

Farrell: My practice comes at this from a different perspective. For the last 20 years I have worked in financial markets and financial systems, including derivatives and capital markets. Since the global financial crisis this has developed a focus in working with financial market infrastructure – such as exchanges, clearing houses, trade repositories and payment systems. My practice in centralised financial market infrastructure has adjusted to also include decentralised financial market infrastructure as it has grown into an alternative way to connect participants in the global financial markets. We work for incumbent financial institutions, market infrastructure providers as well as new entrants and regulators and governments in this area. Including those in our other offices around the globe, I would estimate that there is more than a few dozen of us currently who have a focus on this area, including its use with smart contracts. This will grow as more of our clients move their focus into this field.

“I always start any explanation with — it’s a ledger just like an excel spreadsheet.” — Joe Dewey

Hansen: Simply stated, my practice focuses on the intersection of technology and money. For the last dozen years, I’ve chaired Perkins Coie’s fintech industry practice group, helping tech companies, retailers, video game companies and wireless companies launch new products and services and navigate the domestic and international financial systems. Having published on legal requirements applicable to “traditional” virtual currencies in the video game and retail sectors, in 2011 pioneers in the Bitcoin and other decentralized virtual currency space asked me to help “keep them out of jail” and build businesses around this new technology. From 2011 until the Bitcoin industry’s watershed conference in San Jose in May 2013, we worked in the trenches with the early pioneers and industry associations dealing with decentralized infrastructure development and early subpoenas and law enforcement inquiries. That was an intense time! I was so rapidly deputizing new subject matter experts from my firm to assist our clients with pressing needs, that it became obvious we needed a unique multi-disciplinary team approach to this technology. So, in May 2013 we launched the first blockchain legal industry practice — complete with a webpage, resources page, weekly team training calls and eventually a blog and the firm’s first mobile app — which has grown to over 40 lawyers focused on all aspects of blockchain technology, from digital currencies to capital markets and distributed applications of all types.

Friedmann: There are a lot of sources to learn about blockchain and a full technical explanation is out of place here. But to orient readers, can one of you describe in a few sentences what the technology is?

Dewey: I always start any explanation with — it’s a ledger just like an excel spreadsheet. What makes the technology special is that everyone participating on a blockchain network shares the same ledger, which, without the need of a central third party, always maintains consensus so that all the ledgers look the same. If you abstract it to that level and avoid discussing all the intricacies of cryptography and merkle trees, then most people quickly realize the potential of being able to keep records of basically anything without the need of a trusted centralized source. From there, you can move on to more complex concepts like smart contracts.

“The innovation is in the decentralization, which tips our traditional thinking upside down because there is no longer a need for one party to be in charge or grant or deny access to a system.” — Dax Hansen

Farrell: When I brief lawyers new to the area (or company boards unfamiliar with the technology) I ask them to think of real property transactions before there were land registries operated by government authorities. Title to a piece of land under such a system is sometimes called “old system title” and is not based on a name being recorded in a register. Instead it is based on holding all of the deeds which show the transactions in the past in the land including the one under which the current owner took ownership. It is based on a “chain” of title. Each time there is a sale, the buyer checks that a valid chain of title is in place, based on the deeds which the seller holds. You can get from here to the idea of blockchain if:

that chain of title to the land is recorded by many people and those people verify each proposed transaction in that land

each valid transaction is added by all of those people to the record they hold and no transaction can be added to any of the records unless those people agree that it was valid

no changes are made to transactions once they have been recorded in this way.

This leaves you with a immutable distributed ledger of transactions – a peer-to-peer database which has validity because of the consensus in its truth.

Hansen: I agree with everything Dewey and Farrell describe. It is novel ledger technology that allows for the immutable recordation, transfer, settlement and audit of any currency or asset that can be “tokenized” — all in a decentralized environment that does not require the participants to trust each other. The innovation is in the decentralization, which tips our traditional thinking upside down because there is no longer a need for one party to be in charge or grant or deny access to a system. Blockchain technology is built on open protocols and often open source software. Blockchain technology also is new platform technology that is enabling an entirely new batch of “smart” transactions in capital markets, insurance, trade finance, supply chain management and smart cities.

Friedmann: OK, so it sounds like there is some pretty deep and sophisticated technology at work here. We know, well maybe I should say I know, that technology scares a lot of lawyers–obviously none of you. Is there something in your background that caused you to gravitate toward Blockchain legal work?

Dewey: I am a geek. My first computer was a Texas Instruments TI 99/4A, which had 16 kilobytes of internal RAM. To put that in perspective, most computers come with at least 2 gigabytes of internal RAM today, and many up to 16 GB. I probably would have gone on to get an electrical engineering/CS degree but for the fact that the internet was unknown at the time and people who went into that profession back then might be stuck designing chip sets for Motorola brick phones. Ultimately, my fascination with the law (which had a somewhat mystical appeal to me since no one in my family had ever been a lawyer) won out, but I’ve always been a computer geek at heart.

A computer in September, 1981. Photo (AFP/Getty Images)

Farrell: I am not a geek. They are way too smart. However, my practice in complex financial instruments and infrastructure has led to a need to to understand logic, mathematical processes and algorithms. It has also led to a need to work with contracts based on international standards and legal “codes” in contrast to legal “language”. It was not a huge step from this to blockchain – from centralised to decentralised market infrastructure. I believe that lawyers are a lost tribe of programmers anyway, because of their use of logic to solve problems. You can work with blockchain without being able to build one.

“It might be that consumers will see the benefits of these without being directly exposed to the blockchain itself — like having the benefit of a more efficient car without knowing what changes have taken place in the engine.” — Scott Farrell

Hansen: The early Bitcoin enthusiasts all seemed to have a connection to the game, Magic the Gathering. Ironically, although I didn’t play Magic the Gathering, I did some legal work on the online game for Wizards of the Coast! More relevantly though, I’ve spent my entire legal career working with innovators to address the regulatory and consumer protection aspects of, and negotiate the commercial agreements around, new technology – especially payments and financial services technology. My mentors at the firm were among the first internet lawyers, so I started my career working on projects where “black letter” law didn’t exist and we had to develop creative ways of advising clients on the application of law to new technologies. That always involves doing a deep dive on the technology our clients are innovating and deploying, actually using the technology. Blockchain technology was immediately compelling to me because I could see its potential to disrupt the status quo.

Friedmann: What do you think the likely impact of blockchain will be on on the business world, esp. financial markets. Also, will it be something we as consumers see directly and, if yes, how?

Dewey: There are so many potential use cases that are likely to be implemented over the next two to five years. While financial services is the low hanging fruit, I think supply chain management will see just as much evolution with blockchain technology. Within financial markets, I believe you’ll see the more standardized financial products, like swaps and other derivatives, switch over to blockchain platforms first. The Barclay’s swap demonstration really highlighted how easily derivatives can be confirmed on a blockchain system. More traditional commercial finance will be next, but will be more difficult to implement because of the lack of uniformity in documentation (i.e., there is no corresponding ISDA set of master agreements for commercial loans). That said, there is a tremendous amount of effort going into “computational law” projects that will lead to legal contracts being constructed my like computer code (even if the user doesn’t see what’s going on behind the scenes). These efforts will lead to more machine readable contracts, which will make it easier to integrate smart contract components into what are otherwise traditional legal contracts.

For example, two parties could enter into a contract for the sale of widgets originating out of China and destined for a “smart warehouse” in the United States. The purchase order document would read like a traditional legal contract, but embedded in the contract would be code uploaded to the blockchain, which code would trigger a payment instruction once the cargo (which is embedded with an NFC or RFID chip) enters the “smart warehouse” at its final destination in the United States. This would replace the existing merchant letter of credit and bill of lading documentation that is still used for much of the world’s international supply chain. This example also shows the close relationship between blockchain technology and the Internet of Things (IoT).

Farrell: I think that there are at least two parts of this. The first is in the private sector — businesses which will have opportunities in improving their services through the adoption of distributed ledger technology. The second is in the public sector — improvement of the services which our governments offer through their use of this technology. In the private sector, financial services are a key opportunity because of their existing relationship with technology and the importance of data to their business. Key areas here are international payments (because of current inefficiencies in low value payments), trade finance (because of the document heavy framework and the absence of a trust environment) and capital markets (because of the standardisation required due to the risks being managed). In the public sector, the cornerstone of a range of services are identity frameworks. This could assist everything from the anti-money laundering checks to welfare payments. It might be that consumers will see the benefits of these without being directly exposed to the blockchain itself — like having the benefit of a more efficient car without knowing what changes have taken place in the engine.

“I agree that lawyers won’t need to be coders. I think the role of lawyers is as architects of coding projects not engineers of them.” — Scott Farrell

Hansen: This is game-changing technology, so the impact on businesses and consumers will be huge. Goldman Sachs and E&Y have recently released compelling reports outlining use cases in all major sectors. Blockchain’s first use case was person-to-person payments, and we are now working through use cases in the financial sector and capital markets. Supply chain management is trending now, and we’ll soon see disruption in other industries, such as health care. Many uses will focus on enterprise and back office applications, but consumers will also interact with blockchains to purchase and manage digital assets, such as music, electronic content, tickets and virtual reality applications. The user interfaces for these applications will become more user-friendly, automating the use of blockchain a new platform technology without requiring users to be versed in public and private key management and encryption.

Friedmann: Your practice already deals with blockchain so perhaps you’re biased but what do you think the blockchain means for lawyers today, 1 year out, and 5 years out? That is, will they need to learn to code? Learn a new body of law? Other?

Dewey: As much as I support efforts to teach people to code, I don’t think it is practical to think all lawyers will becoming computer coders. I think contracts will be built like software in the future, but for most lawyers, they will still interact with a lawyer-friendly (i.e., non-coder) user interface with the code conversion occurring behind the scenes. There are several efforts to build domain specific languages for drafting legal contracts. An organization called Legalese is spearheading a wonderful, collaborative effort to develop a DSL [domain-specific language] for contract drafting. I’m also working on a library in the Go programming language that will allow “legal engineers” to build contracts with code. Some of us will be able to build contracts in a text editor just like computer coders, but other lawyers will still be able to take advantage of all the benefits of a DSL for coding contracts through the use of UI/UX interfaces that allow them to drag and drop clauses or use an overlay module in Microsoft Word.

Farrell: I agree that lawyers won’t need to be coders. I think the role of lawyers is as architects of coding projects not engineers of them. There are plenty of brilliant professionals in information technology who can create the code needed far better than a body of cross-trained lawyers. The role for lawyers in the context of smart contracts is to guide where that code isneeded. I also believe that anything beyond the simplest transactions will always require both a human and a computational element— meaning that not all of a contract relationship can be expressed in code. There is a difference between logic and reason, law has both but computers struggle with the latter. For example, a computer which can work out what is “commercially reasonable” in a contract law sense is science fiction at present. This combination of human and computer intelligence is the foundation behind the “DnA” (Digital and Analogue) smart contract architecture which we have developed and recently published open-source.

“There are probably some good parallels between the internet in 1994 and where blockchain is at today.” — Joe Dewey

Hansen: The legal industry, as with all other industries, eventually will be disrupted by blockchain technology. Just as legal professionals have had to adapt both their substantive legal advice and practice management to internet and mobile technologies, they will need to adapt to blockchain technologies. Clients will demand sophisticated legal advice related to their complex use of blockchain technologies to evolve their business practices. Moreover, the software and database tools lawyers use will incorporate blockchain technology. Lawyers’ basic function of contract drafting and dispute arbitration may be somewhat displaced by smart contracts, but I think lawyers will take on an enhanced role of creating and mediating legal structures within which smart contracts will operate.

Photo credit: YOSHIKAZU TSUNO/AFP/Getty Images

Friedmann: A lot of folks who read my blog are in law firm management (including marketing, IT, knowledge management, and finance) or at legal providers. On the one hand, some argue this is the “1994 of blockchain” meaning it’s where the Internet was just as it was exploding in use. On the other hand, it would be hard for me to argue persuasively today that law firm staff or legal vendors need to rush out to learn blockchain beyond some general awareness. So, just where are we? How long before staff or vendors working with lawyers need to learn, think about, or worry about blockchain? And why or in what ways?

Dewey: There are probably some good parallels between the internet in 1994 and where blockchain is at today. What has changed, however, is the law firm business environment. In 1994, law firms were simply not going to be at the forefront of developing technology. They were going to be consumers of whatever technology was provided to them by other providers. That’s not the case today. There are a number of law firms, mine included, who are actually developing technology in-house. I think this is an important distinction between now and 1994 because law firms today have an opportunity to gain a competitive advantage over other firms based on their technological capabilities. For those firms who wait around for software companies to develop blockchain solutions for them, they risk being at a competitive disadvantage to those firms who develop and implement those solutions themselves. For these reasons, I think firms would be wise to designate one or more individuals within a firm (preferably from a wide cross section of professionals and support staff) to really stay abreast of what is going on in this area. It may take five years before we see real world implementations of blockchain, but it could be a year. No one knows, so why take the chance of being left behind?

“Blockchain years move faster than dog years!” — Dax Hansen

Farrell: There are a few important themes here. The first is that change driven by technology often works on an exponential scale. This means that you can’t really see the extent of what is happening at the start and then, when you can, it is already happening so quickly that you can’t catch up. So some care needs to be taken in thinking that any change can be ignored until it has an impact. The second is to look at the landscape, not of lawyers, but of their clients and their lawmakers. We are seeing significant investments in blockchain by both — including global banks, central banks, major governments. These include serious thinkers, people who are not merely dazzled by something shiny and new. The third is to see the theme beneath the technology. Blockchain is a form of peer-to-peer database. This concept of sharing, whether property, products or services, is a discernible current of change in many economies. As law is an information and service industry it needs to pay particular attention to a potentially significant way in which information is shared, verified and used. We are not immune from change. I do not believe that the solution is for lawyers now to buy a particular product or service, instead I think that in the face of this new engine of trust, which could replace part of our role, we need to think carefully about what actually is the service which our clients value.

Hansen: Blockchain technology is the most disruptive technology I have seen in my legal career to date. Its innovative potential is astounding. It has already changed peer-to-peer payments and is currently changing capital markets. Major tech companies, venture capital firms and financial institutions have joined the startups who initiated the blockchain revolution. Blockchain-specific laws and regulations are being adopted around the world. Blockchain technology is here to stay, folks. It is also extremely complex, requiring significant ramp up time to understand — only to have it evolve again. Blockchain years move faster than dog years! Perkins Coie invested early in the learning curve, allowing it to provide sophisticated advice to early adopters. Any firm only now getting started on blockchain has missed the opportunity for a first mover advantage, but still invest because blockchains will soon be top-of-mind for its clients.